Ontario Budget 2017: A dangerous balancing act

April 28, 2017

Yesterday, the Ontario government released its 2017 budget, A Stronger, Healthier Ontario. Given the government’s fiscal position, will these new initiatives really strengthen Ontario, or are we standing on shaky ground?

The Institute analyzes Ontario’s fiscal performance as well as its proposed policies on health care, business growth, child care, housing, and employment and skills training.

Ontario’s fiscal performance: No plan to pay off the debt

The Minister of Finance’s speech could have begun with: “I’d like to thank the economy for getting us to a balanced Budget.”

After 9 consecutive deficits, Ontario tabled a balanced budget for the 2017-18 fiscal year. Revenues are projected to be $3.9 billion higher than what was projected in 2016. However, the anticipated tax revenues that got the government to its balanced budget are highly dependent on the success of the economy. Without strong economic growth, the government will have to make spending adjustments to stay in the black.

Potential housing market corrections and the proposed housing measures present another considerable threat to the government’s revenue stream. Even moderate changes will impact the Land Transfer Tax revenues as well as personal income tax, corporation tax, and harmonized sales tax. Total expenses planned for the upcoming year are higher than reported in the previous budget, driven by increases in health, education, and postsecondary and training sector.

For the last 8 years, the interest on debt has been the fastest growing line item in the province’s expenses. This year, it grew at a rate of 3.6 percent. External factors have helped the government forecast an ever so slowly decreasing net debt-to-GDP ratio. Still, the government provides no clear plan to pay off their debt. Net debt has risen by $10 billion and net debt as a percentage of GDP remains high at 37.5 percent. The days of deficits might be behind us but the ‘Ministry of debt’ lives another day.

Ontario’s policy initiatives

Health care: A distraction from real issues

As usual, health care is the government’s largest budget priority. Yet, the key announcements from yesterday’s budget may distract Ontarians from the real issues within the health care system.

While the Institute is pleased to see investments made in enhancing interprofessional primary care teams as well as universal pharmacare for people under 24 years old, we urge stakeholders not to lose sight of the real monetary investments needed in the health care system. The government plans to grow the health sector at 3.3 percent annually from to 2019-20. However, as indicated by the Financial Accountability Office of Ontario, with cost pressures like an aging population, population growth, and inflation, it is unclear whether these health expenditures will be sustainable going forward. The $1.3 billion spent to decrease wait times and $518 million in funding for hospitals would not be sufficient fixes in the future. (For more details on these policies, see our recommendations here.)

Business Growth Initiative: Making good progress

The Budget provides updates on several commitments under the Business Growth Initiative (BGI) including the Scale-Up Voucher Program and Small Business Innovation Challenge. It also introduced new investments through BGI that target future and emerging technologies in Ontario including artificial intelligence, quantum technologies, fifth-generation wireless technology, advanced computing, and autonomous vehicles. These investments will capitalize on Ontario’s strengths and capabilities by investing in networks of expertise and industry-led initiatives. The Institute applauds the government’s decision to double down on transformative, cross-sectoral technologies.

Child care: Band-Aid solution when strategy is needed

Affordable child care is essential to improving prosperity in Ontario. The Ontario Budget will be making 24,000 of the planned 100,000 new child care spaces available this fiscal year. Even though 60 percent of the new spaces will be subsidized, new spaces alone do not achieve change. They simply replicate the current flawed system on a larger scale. If the government wishes to take strong leadership on child care, they must consider a long-term province-wide strategy. This strategy should consider a sliding fee scale based on income with a cap on fees. The cap component of a child care cost strategy is seen in most European countries with universal systems.

Housing: Complex but necessary measures

Three measures stand out from the government’s 16-point plan on housing:

The ‘Non-Resident Speculation Tax’ of 15 percent on residential purchases in the Greater Golden Horseshoe by foreign nationals and corporations

Toronto vacant home tax

Expanding rent control to units built after 1991

These policies are a cautious but prudent step aimed at stabilizing the real estate market. More severe approaches (such as taxes applying to 100 percent of the market) could have threatened the overall economy. The Non-Residential Speculation Tax intends to have a signaling effect on speculators. This could lower expectations of future profits from housing as an investment, allowing more Ontario families to purchase homes.

The Institute is also pleased to see the addition of a vacant housing tax for the City of Toronto (and potentially other cities) as a way to provide it with greater revenue generating tools.

The expansion of rent control will make housing more affordable for renters in post-1991 buildings. However, rent controls may decrease the quantity and quality of rentals. Ontario’s rental supply increased sharply after rent controls were originally removed in 1997. Even with this policy measure, rental units will have long-term affordability issues.

Employment and skills training: Programs awaiting modernization

The government has made a highly skilled and adaptable workforce a priority through its Lifelong Learning and Skills Plan. The Budget rightly recognized that today’s labour market has changed, and employment and skills training programs must change accordingly. Yet, no program changes were outlined in the Budget document. Instead, the province makes ambiguous commitments to work with various Employment Ontario (EO) stakeholders to “modernize” Second Career and the Canada-Ontario Job Grant.

The Institute recommends that the government act swiftly on its promise to update these programs. In particular, funding requirements for third-party providers who deliver EO programs should focus on outcomes such as job seekers obtaining gainful, long-term employment, rather than outputs that include how many resume workshops sessions they attend.

The dangerous balancing act

The government is playing it cautious on major investments, attempting to stabilize spending and focus on the balanced budget. This is a dangerous balancing act. Of biggest concern to those hoping for increased competitiveness and prosperity in the province is provincial debt. If we rely solely on economic growth to keep things at bay, we may be in big trouble in the years ahead. On top of all this, a $400 million drop in the reserve in the face of aggressive revenue growth assumptions and open-ended programs makes the balancing act even harder. Worse still, the Budget projects an education sector growth rate that doesn’t seem to align with previous decisions to cap class sizes in Full Day Kindergarten and grades 4-8 and increase teacher compensation.

Here’s hoping that what is outlined in the Budget does create a stronger, healthier Ontario. Time will tell.